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Risk Metrics CS-18. Max J. Rudolph, FSA CFA RHU FLMI MAAA Vice President and Actuary Mutual of Omaha Enterprise Risk Management July 29, 2003. Risk Metrics Audience. Key individuals have differing backgrounds, education, perspectives and goals internal audiences

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risk metrics cs 18

Risk Metrics CS-18

Max J. Rudolph, FSA CFA RHU FLMI MAAA

Vice President and Actuary

Mutual of Omaha

Enterprise Risk Management

July 29, 2003

risk metrics audience
Risk Metrics Audience
  • Key individuals have differing backgrounds, education, perspectives and goals
    • internal audiences
      • senior corporate management
      • actuarial, accounting and investment professionals
    • external audiences
      • securities analysts, rating agencies, regulators
  • Absence of common risk management language
  • Graphics are the key…but not always
risk return profile1
Strengths

distribution of returns

identify challenging scenarios

tail of distribution is “THE RISK”

test hedges

compare against deterministic scenarios

provide summary statistics

mean, median, quartiles

Weaknesses

scenarios must cover universe - do they?

model run time

accuracy doesn’t always follow large volumes of data - GIGO (garbage in, garbage out)

Risk/Return Profile
economic surplus
Economic Surplus
  • Difference between the market value of cash inflows and outflows
    • asset and premium cash flows are combined
    • liability cash flows
  • Spirit of fair value accounting
  • DS = DL + (DA-DL) * MVA/MVS
    • DS,DA,DL duration of surplus,assets,liabilities
    • MVA,MVS market value of (all) assets,surplus
    • Mismatch DA-DL
    • Leverage MVA/MVS
economic surplus1
Strengths

drives duration/convexity

puts assets and liabilities on level playing field

you can’t eat a rate - based on cash flows

create values at lowest level - can roll up

intrinsic value - starting point for market value discussion

Weaknesses

learning curve

see David Babbel papers

model run time

sensitive to interest rates

reliance on canned software

Economic Surplus
additional risk metrics
Additional Risk Metrics
  • Internally measured liquidity ratio
  • RBC diversification ratio
  • Key Rate (Partial) Durations
slide11

The key is to use multiple tools, leverage off of what you are already doing and know your audience (graphics)

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